Wednesday, October 4, 2017

Another Good Pump And Dump

This society doesn't know a Ponzi scheme when they see one. A ponzi scheme is when the insiders sell at the outsiders' expense. Meaning insiders have information about the intrinsic value of the asset (or lack thereof) that outsiders don't have. Which is essentially how the IPO market operates:

Traditional market makers - which no longer exist - used to add value by trading against the market - buying on weakness and selling on strength. Buffering declines and attenuating momentum. Today's HFT-based "market makers" do the opposite - they sell on weakness and buy on strength. The system "works" to the extent that it accelerates upside momentum while exacerbating declines. As momentum accelerates to the upside, money is forced in from the sidelines and shorts are forced to cover. For active managers benchmarked to the S&P 500 it's a serial nightmare forcing them to sacrifice hedging of capital to save their P&L. Which is why they are leaning ALL IN in the last quarter prior to bonus, they are way behind their benchmark: 

Sometimes I get the feeling that the sole purpose of this new momentum-based "system" is to allow Wall Street to dump junk IPOs into the market. These are the largest IPOs from the past year - each one came at or near a market peak:

Of course, once the animal spirits get flowing, they get a little bit out of control, flowing into any and every asset class that hasn't already been pumped and dumped in the current cycle. In this cycle that means crypto-currencies all around. Over a thousand of them and growing exponentially by the day. The current boy-man fantasy of the day - should I say one of them - is that we will all have our own crypto-currencies that soar ever-higher and never implode. It reminds me of a colleague who once said that in Pakistan everyone has servants - even the servants have servants. I didn't have the heart to tell him he's a fucking moron. 

To be sure some of these currencies will survive, the vast majority will not. They are all to some extent ponzi schemes having zero intrinsic value. Of course, one can argue that all fiat currencies have no intrinsic value - also true - however, they are legal tender, meaning they have monopoly control over the local currency market(s) and are not proliferating like rabbits. There are more crypto-currencies globally than there are fiat currencies. All of the major cryptos have peaked. Most, a long time ago. The best performing crypto this year, Ethereum, peaked in August.

Bitcoin has carved out a head and shoulders top indicating that the third wave down is imminent:

Here is where it gets interesting. Cryptos are linked to stocks via the mining process which is semiconductor intensive. As the number of cryptos proliferated, the demand for semis soared. As this process unwinds, semiconductors - the last sub-sector holding up the Nasdaq, will collapse.

And then gamblers will discover momentum to the downside...